The Capacity Market

Great Britain has a Capacity Market. These are annual auctions to award contracts that secure the supply of electricity generation for the next winter (T-1) or for four years' time (T-4). The Capacity Market drives what capacity is built on the system, so it is important in determining the evolving supply stack.

The GB Modo Forecast includes a forecast of Capacity Market pricing, volume, and de-rating factors. Forecast subscribers can download the numbers in our Scenario Databook.

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For more information on the Capacity Market, check out the Energy Academy

For more information about the latest T-4 2024 Capacity Market results, see this recent research piece on the Modo platform or search for the 'Capacity Market' by hitting control+K.

The Capacity Market prices influence retirement and new-build decisions

The T-1 auction primarily indicates the cost of prolonging retirement for thermal assets; the T-4 auction mostly indicates the cost of new build generation assets.

E.g. if someone bids into the T-4 auction and is successful, their asset will need to come online 4 years later.

The Capacity Market does not impact the daily storage operation (or any other generator). Assets with a Capacity Market contract also participate in wholesale, balancing, and ancillary markets.

How Modo forecasts Capacity Market auction rounds

Capacity Market prices are updated as part of our Capacity Expansion Model. For the first iteration of the model we use forecasted values which are calculated as follows:

1. Using the Consumer Transformation Future Energy Scenario (FES) from NESO, we form a base view of the upcoming capacity that will come online.
2. We consider each technology's entrance cost, applying a "learning rate" (i.e., assuming that technologies get cheaper to build over time). We take technology cost numbers from the latest auction or other Modo research and assume a cost of capital.
   1. Assets supported by other state aid, such as a Contract for Difference, cannot be awarded a Capacity Market contract.
3. Get the volume of capacity required by running our fundamentals model, using the annual minimum margin to assess how much capacity should be built to avoid loss of load.
4. We use these to determine each unit's capacity and price point. The point at which forecasted demand meets supply on the stack sets the Capacity Market price. In GB, the price is often set by gas, which is cheaper than hydrogen, CCS, or long-duration storage but is more expensive than (most) renewables.

Our stated CM clearing prices are the maximum a plant gets paid - ie with no de-rating factors.

Within the CM, de-rating factors are applied to the overall capacity market price (given in £/kW) and are technology-specific. Each technology will have a derating factor applied. CCGTs have a 91% derating factor, and battery storage will have a much lower derating factor as it is of limited duration. De-rating factors tend to reflect whether an asset can go on providing power endlessly.

In recent years, de-rating factors have been particularly low for 1-hour and 2-hour systems. They were 11.34% for 1-hour systems in the delivery year 2024/2025. More on this here with current storage de-rating factors listed here.

We forecast de-rating factors for a 1, 1.5, 2, and 4 hour-duration battery storage system.

Our calculation:

We convert Capacity Market revenues from £ / kW to £ / MW / year to use in our forecast.

(The T-4 or T-1 clearing price for that delivery year) x (the de-rating factor forecast) = £k / MW / year

Capacity Market Reform will come, and Modo assumes it will have a carbon element

In July 2023, DESNZ published a report detailing alternative Capacity Market auction designs. The report detailed three potential designs, all shifting from a technology-neutral Capacity Market to one promoting low-carbon capacity buildout and better aligning with decarbonization goals.

One of the designs is a single auction with additional multipliers to increase revenues for low-carbon generators:

A single auction with multipliers: In which technologies with different characteristics
participate in a single auction and with a single clearing price, but in which technologies
with certain characteristics have a multiplier applied to the clearing price in the auction
to reflect their additional value in delivering a decarbonized (and/or flexible) electricity
system.

We assume an additional derating factor for carbon-emitting generators from 2030 onwards to reflect these possible reforms. This derating factor decreases with time and is first introduced for the lowest efficiency and highest carbon-emitting generators.

This approach introduces different capacity market prices for different technologies.

The capacity market price that we report is the highest price acquired by any technology for a given year.

Given its ability to deliver decarbonized and flexible power, we anticipate that this is the price that BESS will be paid.